One way or another, the North American lumber market is significant to the market in Australia. Supplies from the US and Canada are one consideration, but more importantly, European supplies to Australia are tied to the fortunes of North America’s market. If nothing else, European suppliers configure their price expectations on the US market, whenever they are able to do so. US conditions contribute to import availability, supply and price.
In this summary, Russ Taylor, managing director for FEA Canada (formerly International WOOD MARKETS Group) provides an outlook for North American lumber demand and prices for 2019.
After surviving a global slowdown in 2015, world lumber markets became favourable as a general trend of rising prices took hold – up until the second half of 2018, that is, when the trend reversed in almost all markets. What happened?
Many factors combined to cause two contrasting scenarios: too little supply with rising prices in H1/2018, especially in the US, followed by too much supply with declining prices by the end of the year.
The outcome is that higher-cost mills in western North America have been curtailing production to contend with below-cost prices, but overall supply and demand fundamentals continue to look reasonable for 2019.
As a result, both the Canadian and US divisions of FEA are forecasting a pleasant surprise in lumber pricing in 2019; in fact, the second-highest average annual levels could be seen. This may be a difficult scenario to fully grasp given the lows reached in December 2018, so here is the analysis behind our conclusions.
Global demand
Total global softwood lumber consumption in 2017 recorded a gain of 1.9 per cent versus 2016, mainly attributable to increases in North America and China. The U.S. achieved substantial lumber consumption growth (+3.7%) that year, as did Canada (+3.8%), but China enjoyed the best results (+13%).
For 2018, global growth in lumber consumption is estimated to have gained about 2.1 per cent, moving up to 341 million m3 (144.5 billion bf net, or 201 billion bf nominal) from 334 million m3 in 2017.
In 2019, all major consuming regions are likely to record gains, with the U.S. and China set to lead all major countries (again) with increases of about seven per cent each. Global softwood demand is projected to reach 350 million m3 next year, an increase of 2.8 per cent from 2018. The outlook for 2020 calls roughly for more of the same, with demand expanding to 359 million m3 (+2.4%).
Global supply
Global softwood lumber production trends in 2019 should almost mirror the pace of consumption – up 2.4 per cent to 342 million m3 (145 billion bf net, or 201 billion bf nominal) versus 2017. For 2019, global production is forecast to grow by 2.2 per cent (to 349.5 million m3).
US production will have a sustaining influence on worldwide production next year: our forecast calls for an impressive gain of up to 4.5 per cent in the US and little advancement in Canada (with the latter potentially diminished by the outcome of US import duties). Smaller gains are likely in other regions, with only Japan possibly recording a negative result.
In 2020, we foresee North American production showing a similar trend to 2019, with US growth exceeding five per cent as mills there ramp up amid a one per cent erosion of Canadian production. Total European production should expand slowly: an increase of just over three per cent is estimated for 2018, and this is expected to drop to around one per cent in 2019-20 as lumber exports to the U.S. and China slow. One of the wild cards in 2019 and 2020 will be the health of export markets.
North American demand
US residential housing construction (particularly single-family) is sluggish. This underperformance is glaring: more than eight years past the cycle peak, the ratio remains near recession levels.
US housing stock is ancient (the median age of an owner-occupied home has risen from 27 years in 1993 to 39 years in 2015) and the supply of new homes is limited.
Housing starts should continue their upward momentum over the next several years, but the risks have tilted decisively to the downside. Our forecast is for starts to average 1.32 million units in 2019 and 1.4 million plus in 2020 (versus 1.26 million in 2018).
Based on slowly improving housing starts and strong gains in repair and remodeling, lumber consumption should increase in 2019 from the levels achieved this year.
North American supply
North American production has grown steadily since 2009 as a result of increasing demand in US housing and all other end-use segments. Reduced exports and rising output by North American mills caused more shipments to be directed to the US.
In addition, there was another significant rise in offshore imports to meet US demand. With more than 50 Canadian-owned mills situated in the U.S., and amid Canadian import duties and stronger prices in 2018, a flurry of capex projects has contributed to a continued expansion of capacity.
US lumber prices
US lumber prices will be lower in 2019 than 2018.
There are several reasons for this, but none that are considered cyclical; therefore, we do not expect a repeat of the short-term supply disruptions that caused prices to spike. Following 2018’s record-high prices, we expect to see an aggressive supply response by the industry that should help prices to remain strong by historical standards. While our forecast for 2019 prices includes a sharp decline from those in 2018, prices on average could be in line with 2017’s strong showing.
In 2020, pricing will resume its upward trend, but with increased volatility over the next two years.
This article is extracted from the December issue of WOOD MARKETS Monthly International Report which was reprinted in Wood Business Industry News. Further summaries can be found at www.woodmarkets.com/publication/wood-markets-monthly.
